The majority of Healthpeak Properties’ future growth will be in the life sciences and medical office buildings, and a potential exists that the real estate investment trust will reduce its investment in senior housing, executives said Wednesday during a second-quarter earnings call.
The senior housing industry is facing a “tough operating environment” with COVID-19, but a portfolio heavy in life sciences and medical office buildings has left the Irvine-CA-based company in a better position than other public REITs, they said.
“We intend for the majority of future growth to be in life science and medical office, which already accounts for a majority of our asset value. The development of life science and our relationship development with [medical office buildings] has become more and more an important part of our growth strategy,” said Thomas M. Klaritch, executive vice president and chief development and operating officer. “It is our view that SHOP [senior housing operating portfolio] and NNN [triple-net leases] have become a more challenging place for public REITs, yet I still feel strongly, as does our team, that this is going to remain vital in the long term. There will still be seniors that have memory care needs or daily living needs, and senior housing provides those services.”
“I still feel strongly, as does our team, that this is going to remain vital in the long term. There will still be seniors that have memory care needs or daily living needs, and senior housing provides those services.”—Thomas M. Klaritch, executive vice president and chief development and operating officer
After a slowdown from March to May, the senior housing transaction market is active again, company executives said, adding that Healthpeak is making progress on several non-core asset sales that would further move its portfolio toward life science and medical office. Currently, Klaritch said, 71% of the portfolio is in those areas.
The REIT had sold $5 billion in senior housing assets over the past four years, Klaritch said. Healthpeak has had inquiries from several players, and some of the senior housing portfolio could be sold depending on pricing, he added, saying, however, that it’s too early to comment.
Looking at the overall portfolio, CEO Thomas M. Herzog said Healthpeak’s second-quarter results generally were in line with expectations, and in some cases better than expected, but that uncertainty remains during the pandemic.
The company’s independent living / assisted living / memory care occupancy and results were in line with expectations, although the senior housing operating portfolio is experiencing a tough operating environment.
Scott M. Brinker, president and chief investment officer, said senior housing performance was better than expected due to expense savings in marketing, repairs and maintenance, as well as Coronavirus Aid, Relief, and Economic Security (CARES) Act funding.
“We incurred significant expenses to help keep our residents and staff as safe as possible under these extraordinary circumstances,” Brinker said, adding that a return to “business as usual” likely won’t occur until a COVID-19 vaccine is available.
Based on reports from its operators across 218 properties, as of July 31 Healthpeak had 111 properties managed by 15 different operators with confirmed resident COVID-19 cases, and 59 of the affected properties reported resident deaths. New COVID-19-positive resident cases declined by more than 50% in late July from a peak in mid-April.
The COVID-19 impact on total expenses in the senior housing portfolio was about 1.6%. Second-quarter total expenses were incrementally about 1.6% higher than original 2020 expectations; the amount was below the low end of the expected 5% to 15% increase reported in May.
Peter A. Scott, executive vice president and chief financial officer, said the company’s second-quarter earnings were affected by COVID-19 in two ways: $20 million in elevated expenses in its SHOP and continuing care retirement community portfolios, and $15 million in CARES Act grants. He said the REIT is in a “rock solid” liquidity position that makes it “well prepared to withstand uncertainty from COVID-19.”
Brinker said June was particularly strong for the senior housing operating portfolio.
“Move-ins were up more than 50% from May and April. Similarly, lead and tours were up dramatically,” Brinker said. “June was a really strong month.”
SHOP occupancy was 77.8% in July, with move-ins down 62% compared with the year before and down 32% compared with June. Eighty-six percent of the REIT’s properties are now accepting move-ins.
Move-outs declined 19% compared with last July and were down 1% from June. July is the third consecutive month in which move-outs declined.
Leads also declined 31% compared with last year, however, and were down 2% from June. Tours also declined 52% from a year ago, and down 8% from June. Operators continue to prioritize digital marketing platforms, and tours were almost entirely virtual in the second quarter.
Looking at just independent living / assisted living / memory care, occupancy was 82.7% in July. Move-ins declined 78% compared with a year ago and were down 72% compared with June. Ninety-three percent of properties are now accepting move-ins.
Move-outs for independent living / assisted living / memory care declined 28% from a year ago and are down 12% compared with June. July was the second consecutive month move-outs declined.
Leads also declined 17% over a year ago and down 2% from June. Tours increased 43% over last year, and 94% over June, with tours being almost entirely virtual in the second quarter.